Physicans' Financial News: October 2007

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â–º GENENTECH

Genentech Continues to Grow Oncology Portfolio

Over the past several years, South San Francisco—based Genentech has carved out a position as one of the clear industry leaders in the world of oncology biotech. Throughout 2007, the 31-year old company has continued to build on its past success, cultivating a richly diverse, highly promising developmental pipeline and capturing unprecedented marketshare with its currently approved stable of cancer therapy products.

Company Overview

Genentech’s achievements, of course, have not been limited to the oncology marketplace. Recently reported company highlights include FDA approval for Lucentis (ranibizumab injection), indicated for treatment of patients with neovascular age-related macular degeneration (a leading cause of blindness in people over the age of 55), seven product-line extensions (or new indications) since 2006 (including three in oncology), and major research breakthroughs that have fed a dramatically expanding product pipeline (Figure). Currently, the company boasts over 50 ongoing drug-development projects. In the second quarter of 2007 alone, Genentech announced the initiation of eight Phase III clinical trials.

Genentech’s line of currently approved oncology products includes Avastin (bevacizumab), which is indicated for use in combination with chemotherapy for first- or second-line treatment of patients with colon or rectum cancer and in combination with carboplatin and paclitaxel for the first-line treatment of patients with non-squamous non—small cell lung cancer; Herceptin (trastuzumab), utilized as first-line therapy in combination with paclitaxel, or as monotherapy in second- and third-line therapy for a number of breast cancer indications; Rituxan (rituximab), indicated as combination and monotherapy in a number of forms of non-Hodgkin’s lymphoma; and Tarceva (erlotinib), used for treating locally advanced or metastatic non–small cell lung cancer after failure of at least one prior chemotherapy regimen and in combination with gemcitabine chemotherapy for the treatment of advanced pancreatic cancer in patients who have not received previous chemotherapy.

Genentech Oncology Pipeline

Drug

Cancer Type

Phase I

14 Compounds

Various types of cancer

Phase II

Anti-CD40

Diffuse large B-cell lymphoma

Apomab

Sarcoma

Avastin

Various types of cancer

Avastin/Apomab

Non—small cell lung cancer

Pertuzumab

Ovarian Cancer

Rituxan/Apo2L/TRAIL

Non-Hodgkin’s lymphoma

Rituxan/Apomab

Non-Hodgkin’s lymphoma

Trastuzumab-DM1

HER2-positive metastatic breast cancer

Phase III

Avastin

Various types of cancer

Avastin/Tarceva

Metastatic, non-squamous, non—small cell lung cancer

Herceptin/Avastin

HER2-positive metastatic breast cancer

Herceptin/Pertuzumab

HER2-positive metastatic breast cancer

Rituxan/Avastin

Diffuse large B-cell lymphoma

Rituxan

Various types of cancer

Tarceva

Non—small cell lung cancer and metastaticnon–small cell lung cancer

Tarceva/Avastin

Metastatic pancreatic cancer and metastatic non-small cell lung cancer

Awaiting FDA Approval

Avastin

Metastatic breast cancer

Herceptin

HER2-positive breast cancer

Avastin

Metastatic renal cell carcinoma

Fast-Paced Growth

Company growth has been robust, especially over the past five years, during which the size of Genentech has more than doubled, growing from roughly 4,000 workers to its current roster of 10,760 full-time employees. Over 900 of Genentech’s employees are scientists whom the company website touts as being among the top researchers in the world in terms of total citations.

Fortune

Genentech’s commitment to R&D is evidenced in its operating budget. About 19% of the biotech’s operating revenues were cycled back into R&D in 2006, a percentage that is well over the pharmaceutical industry average. R&D expenses, on a non-GAAP basis, increased 58% to $564 million, from $356 million in the second quarter of 2006. Non-GAAP R&D expenses as a percentage of operating revenues were 19%, compared with 16% for the second quarter of 2006. For nine consecutive years, including 2007, magazine has named Genentech to its list of “Top 100 places to work” in the United States.

The year 2007 also marked the first time that Genentech grew larger by acquisition. The company recently completed its merger with Tanox, Inc., a Houston, Texas—based drug concern. For the past 11 years, Genentech, Tanox, and Novartis have collaborated on the development and commercialization of Xolair. In acquiring Tanox, Genentech eliminates the royalty on Xolair sales, which it previously paid to Tanox and obtains Novartis’ profit share and royalty payments to Tanox.

Total 2006 annual operating revenues were reported at approximately $9.3 billion, representing an increase of roughly 40% over the previous year. According to the most recently available financial data, Genentech has maintained its positive fiscal momentum, with results for the second quarter of 2007 on pace to exceed 2006 numbers. Total U.S. product sales for the second quarter of 2007 exceeded $2.1 billion (as compared with $7.6 billion for all four quarters of 2006 combined) and total second-quarter operating revenues were over $3 billion. Net second- quarter income (GAAP) was $747 million (compared with $2.1 billion for 2006). Genentech’s unrestricted cash and investments portfolio totaled approximately $5.1 billion as of June 30, 2007.

Historically, Genentech stock has done extremely well, having split 6 times (including five two for one splits and one three for two split) since its initial public offering in October, 1980.

Oncology Progress

Genentech currently holds the number 1 position with respect to oncology sales in the United States, which exceeded $5 billion in 2006. Over the past 18 months, Genentech has attained two new indications for Avastin, and one new indication for Herceptin.

Additionally, positive Phase III study results were recently reported for Avastin in renal cell cancer, a Phase II study of Avastin plus Tarceva in non—small cell lung cancer, and a phase II study of Omnitarg (pertuzumab) in advanced ovarian cancer.

Genentech also announced the submission of two supplemental Biologics License Applications (sBLAs) for Herceptin in adjuvant breast cancer based on data from the BCIRG- 006 trial. One of the submissions has the potential to add Herceptin as part of a labeled combination therapy option for women with HER2-positive breast cancer. Also, an Avastin sBLA (for use of Avastin in combination with chemotherapy in first-line metastatic breast cancer) was resubmitted to the FDA just prior to presstime. Further, an interim analysis of a second Phase III study of Avastin in advanced renal cell cancer showed that patients receiving Avastin in combination with interferon had increased progression-free survival and tumor response rate compared with patients receiving interferon alone. The trial, conducted and analyzed by the Cancer and Leukemia Group B (CALGB), is ongoing. A final analysis of overall survival, the primary endpoint, will be conducted when the data are mature. The company plans to include information from the CALGB study as support for a potential sBLA submission based on Roche’s AVOREN study.

Genentech is also pursuing strategic partnerships to further enhance its progress in the oncologic realm. For example, the biotechnology concern has forged a collaboration with Abbott Laboratories. Under the terms of the agreement, the two companies will partner in the research, development and commercialization of ABT-263 and ABT- 869, two investigational anticancer compounds discovered by Abbott Laboratories’ scientists. The companies will co-promote any resulting products in the United States.

ABT-263, a Bcl-2 family protein antagonist, restores apoptosis—a natural process by which damaged or unwanted cells die and are cleared from the body—in a variety of cancer cells. ABT-869, a VEGFR-based multi-targeted kinase inhibitor, suppresses tumor growth by preventing the growth of new blood vessels that supply the tumor with oxygen and nutrients and by inhibiting key angiogenic signaling pathways. Both compounds are currently in Phase I clinical trials in a number of tumor types. Phase II clinical trials for ABT-869 in several tumor types will begin this year. Beyond those two compounds, scientists at the two companies will use their expertise to conduct additional oncology-related research.

Overall, Genentech has eight ongoing inter-company collaborations for products that are either currently in clinical development or expected to move into clinical development within the next year or two.

Challenges Ahead

Genentech’s achievements have been profound. However, the road ahead is filled with challenges. Numerous Wall Street analysts have expressed skepticism that Genentech can maintain its recent pace of frenetic growth. The pressure to duplicate or exceed the 70% growth rate attained in 2006 is immense and it is indeed unlikely that such a feat will be equaled, especially in the face of steadily increasing competition.

â–º ImClone SYSTEMS

Erbitux News Initially Raise ImClone Shares

If the seemingly positive results of a recent Phase III trial serve as any indication, oncology drug Erbitux may be well on its way to a lucrative new indication. The agent, currently approved for the treatment of colon cancer and head and neck cancer, demonstrated prolonged survival in a large Phase III cohort of patients with lung cancer. Shares of ImClone Systems, New York City, rose dramatically as Wall Street investors reacted to the data, posting a single-day gain of 22%.

Looking ahead, investors speculated that Erbitux, if it gains a new indication by the FDA, might have future potential to take marketshare from Genentech’s Avastin, the current standard of care for first-line lung cancer treatment. These concerns might have been exacerbated by the enrollment criteria of the Erbitux trial (the study included patients with all subtypes of non—small cell lung cancer; Avastin cannot be used in certain lung cancer subtypes due to safety issues).

ImClone Systems originally developed Erbitux but partners with Bristol-Myers Squibb, New York City, to market the drug in the United States. The pivotal research, however, was conducted by neither company. Instead, the Phase III trial, known as the “Flex” study, was conducted and announced by Merck KgaA, Berlin, Germany, the company that is responsible for marketing the drug to European consumers.

Flex findings indicated that Erbitux, when utilized in conjunction with chemotherapy, successfully increased overall survival, when compared with use of chemotherapy alone, in a two separate populations of patients with advanced non—small cell lung cancer who had not received any previous chemotherapy. Erbitux is the first drug in its class (EGFR inhibitor) to demonstrate enhanced survival in patients with first-line non–small cell lung cancer. At presstime, no further study data or details had been made available.

The positive nature of the Flex study findings somewhat blindsided investors and likely came as a surprise to a number of industry insiders as well. This is because it was only very recently that Erbitux’s prospects in the lung cancer appeared to be quite dim. Just last July, a lung cancer indication seemed unobtainable after a seemingly similar Bristol- Myers Squibb study yielded bad news. Results of the study, BMS CA225, were generally acknowledged as disappointing.

Perhaps crucially, however, a key variable, namely, a different chemotherapy regimen, separated the Flex study from BMS CA225. While the July 2007 Bristol-Myers Squibb study combined Erbitux with paclitaxel and carboplatin, Flex researchers chose to combine Erbitux with vinorelbine and cisplatin. Interestingly, the study locations may have predetermined their respective failure and success. The former combination chemotherapy regimen is commonly employed in the U.S. The latter regimen tends to be favored by European physicians.

â–º AstraZeneca

AstraZeneca Prostate Drugs Enters Phase III

A promising new prostate cancer treatment will soon enter into Phase III clinical trials. The compound, an oral agent currently known as ZD4054, is indicated for the treatment of men with hormone resistant prostate cancer. AstraZeneca, London, England, the drug’s manufacturer, announced that Phase III development will be initiated by the end of this year.

The focus of Phase III trials will center upon ZD4054’s role in patients with both metastatic and non-metastatic hormone-resistant prostate cancer. Research will evaluate the agent both as a monotherapy and as a combination therapy component, in conjunction with docetaxel, branded Taxotere. As opposed to the monotherapy study, which will encompass both metastatic and non-metastatic hormone-resistant prostate cancer, evaluation of combination therapy efficacy and safety will be confined to hormone-resistant metastatic prostate cancer.

According to AstraZeneca, the drug’s promotion from Phase II to Phase III was based upon evidence provided by its recently completed Endothelin A Proof of Concept (EPOC) study. The randomized Phase II study furnished statistically significant survival data. Findings from EPOC were presented for the first time at the 14th European Congress of Clinical Oncology in Barcelona, Spain, held September 23-27, 2007.

The drug’s mechanism of action affects a specific blockade of the Endothelin A receptor. Researchers hypothesize that blocking this receptor may facilitate the inhibition of numerous cancer processes, including tumor cell proliferation, tumor cell survival, tumor angiogenisis, and the pathophysiology of bone metastases. It is believed that a primary advantage of a specific Endothelin A blockade is that the ZD4054 works without blocking the Endothelin B receptor, which may encourage the biologically beneficial process of apoptosis (the death of unhealthy cells).

In an AstraZeneca press release, John Patterson, Executive Director for Development, AstraZeneca, explained, “The mainstay treatment for prostate cancer is hormonal therapy. (However,) the majority of patients eventually become resistant to hormonal treatments. For these men there are currently few proven options apart from chemotherapy, and the prognosis is often poor. ZD4054 offers a novel potential treatment.”

If approved by the FDA, ZD4054 will join a growing portfolio of prostate cancer medication available through AstraZeneca. Current FDA approved AstraZeneca prostate cancer therapies include hormonal treatments such as Zoladex and Casodex.

Statistics furnished by Cancer Research UK state that prostate cancer, the second most common cancer after cancer of the lung, strikes over 670,000 men annually around the world. Roughly one in nine of all new cancers in men is due to prostate cancer.

â–º KIADIS PHARMA

One Blood Cancer Treatment Clears Phase II Hurdles, Another May Hit Market By 2009

Kiadis Pharma, Groningen, the Netherlands, recently announced successful results following the completion of a Phase II clinical trial for Reviroc, an end-stage blood cancer therapy that is employed to eliminate any and all residual cancer cells from autologous grafts in bone marrow transplantations. Bone marrow transplantations are a treatment option for patients suffering from blood cancers, such as leukemia and lymphoma. An autologous transplant uses the patient’s own bone marrow to serve as a graft.

According to its manufacturer, Reviroc fulfilled the key endpoint of the Phase II study, yielding an improvement in terms of overall survival. Other important objectives of the nonrandomized, multisite, open-label study included the evaluation of product safety and the ability of Reviroc to effectively eliminate cancer cells from a contaminated graft.

According to researchers, all of the grafts showed excellent engraftment, demonstrating that the agent had no negative impact upon the graftitself.

To analyze efficacy, Reviroc clinical trial data were evaluated against a patient control group from the center for international blood and marrow transplant research (CIBMTR). Reviroc-treated patient outcomes were compared with results from the CIBMTR database (of patients who had received an autologous transplant without Reviroc). Findings demonstrated that at three years post-transplantation, the patient cohort that was treated with Reviroc had an 80% chance of survival, while the survival rate of the CIBMTR control group was 55%. The satisfactory Phase II results allow Kiadis to move its product forward into Phase III testing.

In a company press release that was released to disseminate news of the Phase II results, Manja Bouman, CEO, Kiadis Pharma, commented, “We are obviously very pleased with the completion of this Phase II trial of Reviroc. It brings treatment with our product a step closer to patients with end-stage blood cancer. The results of this trial therefore mark an important milestone.

In related blood cancer news, Cell Therapeutics Inc., Seattle, Washington, stated that pixantrone, its lymphoma product, could achieve FDA approval as early as 2009. Federal regulators have relaxed requirements for the size of a key late-stage trial, a move that the company asserts will greatly expedite its development process. In addition, the FDA will allow the marketing application to be bolstered by safety data from another pixantrone trial, the RAPID study.

According to Cell Therapeutics, its Phase III study, entitled the EXTEND trial, will be finished by the end of 2007. A full analysis will commence immediately and is likely to take up a majority of the first half of 2008. The EXTEND trial will test pixantrone as monotherapy in 17 countries targeting patients with aggressive non-Hodgkin’s lymphoma that have relapsed following treatment failure with two or more therapies. Shares of Cell Therapeutics rose 3.8% shortly after the news was released.

â–º BIOTECH ISSUES RETAIN MOMENTUM, STOCKS SHOW SIGNS OF LIFE

In the late 1990s and early part of this decade, an interesting David versus Goliath narrative developed among many drug industry experts and analysts. The story was that smaller, more nimble, less risk-averse biotechnology concerns were and would continue to outperform traditional pharmaceutical companies. Big pharmaceutical houses had seemed to become overgrown with inflexible business models that were behind the times to compete. A paradigm shiftseemed to be in process, representing revolutionary transformations and radical transitions of major proportions. Industry dynamics would never be the same. It was a fascinating plot line that made for voluminous pages of interesting reading in industry trade publications, business journals and newspapers. There was only one problem with the script: reality has tended to be far more complex.

As 2007 quarter one and quarter two equity performance has underlined and emphasized, big pharma is here to stay. Although biotech stocks have regularly (and somewhat spectacularly) outpaced their larger drug company competitors over the past several years, the first half of 2007 witnessed an extended pause in the trend of biotech stock market primacy. Throughout the first half of 2007, the equities of traditional drug manufacturers outperformed the biotechnology sector. While biotech company stocks dropped by about 1%, big pharma issues increased at a rate of almost 5%. Particularly impressive gains were posted by familiar industry stalwarts such as Merck and Co., Inc., Berlin, Germany; Bristol-Myers Squibb, Plainsboro, New Jersey; and Schering-Plough, Kenilworth, New Jersey.

Analysts, in explaining the short-term stock market phenomenon, point to unrealistic investor expectations of biotech performance (making biotech, in effect, a victim of its own success) and disappointment with recent setbacks suffered by marquee biotech concerns such as Amgen, Thousand Oaks, California. Amgen, during the first two quarters of 2007, suffered a sharp drop in stock price as Arenesp and Epogen, its blockbuster anemia drugs, struggled under the burden of ramped-up FDA warning labels.

At the same time, market watchers warned investors to take the first two quarters of 2007 with a grain of salt, warning that it is premature to read too much into relatively short-term stock market moves. Indeed, as third quarter 2007 performance results (still incomplete at presstime) unfolded, for example, biotech issues quickly roared back with a vengeance, completely reversing the results posted in the first half of 2007 and then some (in less than half the time period), first catching up with and then eclipsing big pharma competitors while large traditional drug industry stocks stagnated. According to a comparison between the AMEX biotechnology (BTK) and AMEX pharmaceutical (DRG) indexes, after biotech’s third-quarter surge, the year-to-date performance of the sector has surpassed that of the traditional drug industry, despite big pharma’s first-half 2007 gains.

Still, as fast-moving marketplace developments continue, a number of industry signs point to the possibility that big pharma’s show of strength was not a flash in the pan, may be repeated in the near future, and that quarter one and two results may be an early indication that something significant might be going on.

Run-of-the-mill biotech setbacks in the marketplace potentially belie a larger story: the tenacious staying power that has enabled big pharma to survive and thrive in a completely new era. According to industry analysts, several key factors explain the continued strength of the traditional drug industry. Most importantly, the sector has learned to adapt and evolve, accepting the realities of the new drug marketplace. Cash-rich large drug companies have been able to fill gaping holes in biotech-oriented R&D programs and replenish depleted product pipelines through a skillful series of company and product acquisitions, licensing agreements and collaborative arrangements. Small biotechs may be nimble, imaginative and bold. However, they often lack the immense capital resources required to being a product to market and attain profitability. Alliances between major drug companies and boutique biotechs combine the mighty investment, marketing and distribution resources of the former with the fresh R&D creativity of the latter, enabling both to prosper.

Fortune

Another industry dynamic that has, to this point, favored the biotechnology sector is generic competition. As big pharma blockbusters lose patent protection, profits are instantly eroded by generic substitutes. Biotech bottom-lines have largely enjoyed immunity from generic threats because the majority of biotech blockbusters are new enough to enjoy continued patent protection. Furthermore, it is notoriously difficult to make and attain FDA approval for generic facsimiles of biotech agents. A recent magazine article suggests that the biotech sector may be on the verge of losing this crucial competitive edge. The FDA is currently in the process of approving a new regulatory pathway for the federal review and approval of so-called “biosimilars,” generic versions of biotech drugs. According to the article, “The new rules represent a sweeping change in the biotech sector, and will present the most significant challenges to biotech medicine makers since their inception 30 years ago.”